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Learn to keep the faith

The roller-coaster journey of the stock markets this year has taught the small investor never to give up on this asset class.

R. Sree Ram        Print Edition: December 2009

Take a slowdown. Mix it with a bearish market. Add simmering inflation, volatile interest rates and a tepid stimulus package. Garnish with an election with a surprise outcome. This is roughly the recipe for what investors had on their plates during 2009. For equity investors, there are invaluable lessons to be learnt from the terrifying roller-coaster ride that began in early 2008. The biggest learning has been to never lose faith in the markets. Investor confidence was badly bruised in 2008 when even blue-chips fell by over 50-60%. But after hitting the lows, the markets bounced back smartly. The lesson: ups and downs are inherent to the stock markets, but good companies will bounce back when the sentiment improves.

The 2009 rebound has been one of the quickest in recent times. When the Sensex touched 8,195 in March, many analysts predicted that recovery could take three to four years, even longer. But robust FII inflows and hectic buying by domestic funds turned the tide. The surprise result of the general elections added to the positive sentiment. It’s not as if the investing community was rooting for the Congress-led UPA, but many were expecting a hung Parliament or a UPA on Left Front crutches. The clear mandate did away with the uncertainty and the markets zoomed after the results. By November, the Sensex had more than doubled in value, much to the surprise of fund managers and investors. The lesson? It is difficult to time the market, so don’t even bother. What you buy is more important than when you buy it.

The year also reminded us that corporate governance is not a mere shibboleth, but an abiding principle. The Satyam episode could have been avoided if its board of directors had questioned Ramalinga Raju’s actions earlier. The lesson here is that investors should check the credentials of the promoters before they invest in a company. Large-cap companies are usually well-researched and their promoters are fairly wellknown. But closely held, small-cap companies with unknown promoters can be risky bets for the uninformed investor.

After a moribund year that saw many IPOs being withdrawn from the market, the primary market showed signs of recovery in 2009. Two PSUs were among the several companies that tapped the market this year. But while the Oil India issue has made investors richer by about 10%, the NHPC shares are trading at nearly 10% below their issue price of Rs 36. What investors need to keep in mind is that the IPO market is not a lottery. No matter how well the merchant bankers sell an IPO, it is always better to wait for the secondary market evaluation before buying shares.

The year also rewrote some investing rules. It’s usually not a good idea to buy troubled companies, but if the company is good and its management is sound, it will not take too much time to get back on track. The stock prices of Tata Steel and Unitech were beaten down to extremely low levels in March because the companies were facing a severe credit crunch. However, after they fixed the problems and retired the high-cost debt, the two stocks zoomed. From Rs 25 in March, the stock price of Unitech has risen 300% to Rs 100 per share, while Tata Steel’s stock price has risen 280% from Rs 152 to Rs 575 in seven months flat. The stock prices of other good companies, such as ICICI Bank, Aurobindo Pharma and Hindalco, have also weathered such shortterm storms in the past.

  • Ups and downs are inherent to the stock markets, but good companies will bounce back when the sentiment improves.
  • It is difficult to time the market, so don’t bother. What you buy is more important than when you buy it.
  • Always check the credentials of promoters before investing in a company, particularly the closely held, small-cap ones.
  • The IPO market is not a lottery; it is better to wait for a secondary market evaluation before buying shares.
  • A troubled company need not be a bad bet if its management is sound. It may not take too much time to get back on track.

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